April 13, 2013

ROBERT HEILBRONER, the author and economist, was often asked where interest rates, the stock market and the economy were heading.

He would say he had no idea, though few non-economists believed him. As he wrote in The New Yorker in 1991, people thought he was hoarding the inside dope so he could make a killing on his own.

Alas, it wasn’t so. He really couldn’t foresee the future of financial markets, or of wages and prices, or of economic production — and he was sure that no one else could, either. Financial and economic forecasting was more art than science, he said. Yet there was a voracious demand for it.

But why? At least Mr. Heilbroner could answer that question. “The human psyche can tolerate a great deal of prospective misery,” he wrote, “but it cannot bear the thought that the future is beyond all power of anticipation.”

Two decades later, financial and economic forecasting has advanced technologically. Vast quantities of data are being analyzed and repackaged in inventive ways. Yet even the Federal Reserve has no certainty about where we are heading, notwithstanding its monumental and largely successful campaign to bolster the value of financial assets, from homes to stocks and bonds.

Is the economy slowing? Is the stock market’s epic rally preparing for a big fall? Are interest rates rising or falling?

There is a torrent of fresh numbers, but they form an ambiguous pattern.

Consider the employment outlook, perhaps the most crucial issue for working people and for the economy’s health. The Labor Department’s report on April 5 was discouraging at best. It showed that American employers added only 88,000 jobs last month, versus 268,000 in February.

That was the slowest pace since June, less than half the number that economists had expected. And the unemployment rate stood at 7.6 percent, shockingly high for a recovery that is nearly four years old. The rate would be even higher if not for the unusually large numbers of working-age people who have dropped out of the job market. There is very little to cheer about here.

On Thursday, the Labor Department issued a happier report. Initial jobless claims dropped by 42,000, to a seasonally adjusted rate of 346,000 in the week ended April 6, the biggest decline since November, and better than economists had predicted. Job losses may be moderating, even if job creation is too slow to put many people back to work.

There’s more. The effects of the federal government’s budget sequestration — $85 billion in spending cuts — are just beginning to be felt. It’s not clear whether there will be a big multiplier effect, amplifying unemployment and sapping growth, as Washington tightens the spigot and government spending shrinks nationwide.

The Fed, which has a mandate to promote “maximum employment,” hasn’t made up its mind about the state of the current labor market. At its last meeting, the Federal Open Market Committee said it was “not yet confident” that the Fed’s low-interest, expansionary monetary policy had ensured an improving outlook for jobs. And the policy makers worried about the risks of financial storms in Europe and elsewhere. That’s drawn from the minutes of the Fed meeting, which were inadvertently released on Tuesday afternoon, a day early, to a small group of bankers and others in an embarrassing breach of protocol. On Wednesday morning, after the general public finally got the news, the stock market resumed its long rally, with major indexes reaching new highs.

That may be because the Fed’s uncertainty about the economy’s strength suggests that it will keep adding fuel to financial markets. Its policies appear to have “supported gains in asset prices and encouraged the flow of credit to households and businesses,” the minutes said.

In fact, that old Wall Street mantra, “Don’t fight the Fed,” has generally been a good guide to financial markets, if not the rest of the economy, since the bull market in stocks began in 2009.

But the minutes also suggested that the Fed was worrying more about the risk of continuing its policies. In a close reading of the text, David Rosenberg, the chief economist and strategist at Gluskin Sheff in Toronto, found that the word “risk” appeared 27 times in the new minutes, compared with eight in December and five in October.

Yet Wall Street isn’t acting as though it expects the party to end soon. Perhaps that’s because another bank with deep pockets, the Bank of Japan, has started a new asset-buying spree of its own.

“Now that the Fed has another central bank joining them, watch out!” said Joseph Carson, director of global economic research at AllianceBernstein. “What happens when they all run out of assets to buy?” He noted that the Bank of Japan said it would buy about $600 billion of bonds and other assets in each of the next two years — roughly doubling the size of its balance sheet. That bank is focused on reviving Japan’s economy, but borders are porous and money flows are global.

Already, rising asset values have restored total household net worth in the United States, which took a beating during the financial crisis, Mr. Carson said. After peaking at $67.4 trillion in 2007, household net worth dropped to $51.4 trillion in 2009, according to Fed figures. But he estimates that it reached $68 trillion in the first quarter this year.

That’s great news for those with substantial financial assets.

“It’s fair to say that people in the upper-income brackets, who have the financial assets, have recovered much more rapidly,” Mr. Carson said. “Prices of financial assets have been rising rapidly. Wages have not. Job creation has not.” People in less exalted income brackets are still struggling.

That helps explain why the recovery has been so uneven. And, despite the conspicuous efforts of the central banks, it helps explain why the economy’s prospects are so uncertain.